Edited version of private advice

Authorisation Number: 1012659641020

Ruling

Subject: Variation to trust and CGT

Question 1

Will the proposed variations to the trust deed or the proposed deed of appointment result in the creation of a new trust and cause CGT event E1 or E2 in sections 104-55 and 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) to happen?

Answer

No

Question 2

Will the proposed variation to the trust deed, the proposed deed of appointment or the effect of these changes having practical application trigger Subdivision 149-B of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

From the time when the deeds of amendment and deed of appointment are executed until the year ending 30 June of the year the effects of the deeds become operational.

The scheme commences on:

When the deed of amendment is executed

Relevant facts and circumstances

1. The Trust was established in 19XX for the collective benefit of three siblings and their families.

2. The primary beneficiaries of the Trust are 3 siblings.

3. Additional members of the class of general beneficiaries are relatives of the primary beneficiaries.

4. The trust grants the Trustee power to amend the terms of the Trust.

5. The Trustee wishes to amend the deed so that upon the death or incapacitation of one of the siblings (defined as the Event) the income of the Trust will be divided into three equal parts and distributed to the remaining siblings and the surviving family of the sibling who is either deceased or incapacitated.

6. In addition upon the Vesting Day of the Trust and provided the Event has also occurred, the Trustee will be required to divide the Trust fund into three equal parts, for each of the siblings or their remaining families.

7. The amendment of the Trust deed by the proposed deed of appointment also provides that on the death of all of the immediate family members of a deceased or incapacitated sibling, one-third share of the annual net income is to be divided equally between surviving siblings and their families.

Reasons for decision

Question 1

1. CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement. CGT event E2 happens if a taxpayer transfers a CGT asset to an existing trust.

2. Where the terms of a trust are amended the question arises as to whether the trust has been subject to resettlement, that is, the existing trust has terminated and a new trust has come into being for tax purposes, resulting in a CGT event.

3. According to Tax Determination TD 2012/21 Income Tax: does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, or varied with the approval of a relevant court?, a change to the terms of the trust pursuant to valid exercise of power under the deed will not cause CGT event E1 to happen unless:

• The change causes the existing trust to terminate and a new trust to arise for trust law purposes, or

• The effect of the change is such as to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust.

4. Drawing on the decisions of Clark and Commercial Nominees, paragraph 21 of TD 2012/21 explains that, assuming there is some continuity of property and membership of the Trust an amendment to the Trust that is made in proper exercise of a power of amendment contained under the deed will not result in terminating the Trust, so long as the amendments are properly supported by the power.

5. Whether a purported change to a trust in exercise of a power under the deed is properly supported by the power is to be determined in accordance with principles of trust law having regard to the scope of the power properly construed. Relevant to this question will be whether the deed itself explicitly specifies conditions that need to be satisfied for the exercise of the power to be effective.

Proposed amendments to the trust deed

6. The Trustee's powers to amend the terms of the Trust are outlined in the Trust.

7. The proposed changes expand the group of persons who can be Appointors and Guardians and their control over the decision making of the Trustee. These changes do not result in any beneficiary being deprived of any part of the Trust fund or any income of the Trust to which they are absolutely entitled in possession, nor do they result in any benefit to the settlor or the Trustee.

Proposed deed of appointment

8. Using the principles of TD 2012/21 discussed above consideration must be given as to whether the valid exercise of the powers to appoint under the deed will result in a new trust to arise for trust law purposes, or lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust.

9. Paragraph 11 of TD 2012/21 provides the following example of settling a trust asset on a new trust:

11. The Hedgerow Trust is a discretionary trust the class of objects of which consists of a large number of entities associated with the Buttercup family. Under its terms, the trustee has a wide range of powers including the power to declare that particular assets of the trust are to be held exclusively for one or more of the trust objects to the exclusion of the other objects of the trust. In exercise of this power, the trustee declares that one of several assets forming part of the corpus of the trust - asset 1 - was henceforth held exclusively in trust for one of the objects, Mr Badger (subject to the trustee's other powers, such as its power of sale). One month later the trustee makes a second declaration to similar effect in favour of Mr Badger in respect of one of the remaining assets of the Hedgerow Trust (asset 2). While the respective declarations do not terminate the Hedgerow Trust, the effect of the declarations is that assets 1 and 2 are no longer held on that trust. Rather, the trust obligations attaching to those assets have changed in a manner consistent with a conclusion that the assets have commenced to be held on the terms of a separate trust for the benefit of Mr Badger as sole beneficiary. As a result, CGT event E1 happens when the separate trust for the benefit of Mr Badger is created over asset 1. CGT Event E2 happens when asset 2 is also transferred to that separate trust.

10. The Trust deed grants the Trustee the power to appoint the net income of the Trust, in its absolute discretion, of the Trust fund as from Vesting Day.

11. By means of the proposed deed of appointment the Trustee wishes to irrevocably appoint the future net income of the trust and from the Vesting Day the Trust fund and income thereof to ensure that on the death or incapacity of one of the siblings the annual net income and capital of the Trust is to be divided into three equal shares so the deceased or incapacitated sibling's family will be collectively entitled to a one-third share of the annual net income and one third of the capital of the Trust.

12. It also provides that on the death of all of the immediate family members of a deceased or incapacitated sibling, one-third share of the annual net income is to be divided equally between the surviving siblings and their families.

13. In exercising the power under the trust deed, the Trustee appoints each part to be paid, applied or set aside for the relevant beneficiaries. The proportion of income is not held on trust for the three groups of beneficiaries, thus causing particular assets to be subject to a separate charter of rights and obligations. The appointment of income in this case is carried out in accordance with the terms of the Trust and a valid exercise of power granted to the Trustee.

14. Regarding the appointment of the Trust fund from Vesting Day under the powers described in the Trust deed, and described in the proposed deed of appointment, the part of the Trust fund is to be held 'in trust' for the relevant groups of beneficiaries. The facts in this case differ from the example provided in TD 2012/21 in that this appointment will occur from the Vesting Day - when the Trust vests - as opposed to a transfer of assets of an existing trust as described in the example. As the Trust has vested, the beneficiaries become absolutely entitled to the Trust fund and no trust resettlement occurs.

15. In this circumstance the appointment of the Trust fund as described in the proposed deed of appointment is carried out by the Trustee within the powers granted by the terms of the Trust deed. And as the Trust has vested when the appointment occurs, it is not considered that CGT event E1 will happen. However, this does not preclude other CGT events happening in relation to the vesting of the Trust.

16. With this in mind, the matter of timing is of no consequence - as CGT event E1 does not happen either at the time the deed of appointment is executed, when the conditional event occurs or when the Vesting Day occurs thereafter.

Conclusion

The variation to the terms of the Trust is made by a valid exercise of power under the deed and the conditions therein. Likewise, the deed of appointment has been made within the powers granted to the Trustee under the terms of the Trust. Both the variation to the deed and the deed of appointment have been made as a valid exercise of the Trustee's powers under the Trust deed. Neither will cause the Trust to terminate and new trust to arise for tax law purposes. Therefore, CGT events E1 and E2 do not happen

Question 2

1. Division 149-B of the ITAA 1997 provides for when a CGT asset of an entity stops being a pre-CGT asset.

2. The asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. The cost base and reduced cost base of the asset are affected if it stops being a pre-CGT asset. The first element of each is the asset's market value at the time the asset stops being a pre-CGT asset.

3. If the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985 and before a particular time, majority underlying interests in the asset were had by ultimate owners who had majority underlying interests in the asset immediately before that day, then that is the case.

4. Special rules apply to calculate the majority underlying interests where CGT event A1 (disposal of a CGT asset), B1 (use and enjoyment before title passes) or death occurs.

5. Taxation Ruling IT 2340 Income tax: Capital Gains: Deemed acquisition of assets by a taxpayer after 19 September 1985 where a change in the underlying ownership of assets acquired by the taxpayer on or before that date, provides guidance on the application of Section 160ZZS of the ITAA 1936 (the predecessor of Division 149-B of the ITAA 1997) in relation to discretionary trusts. Paragraphs 4-8 rules that where a trustee continues to administer a trust for the benefit of a particular family the Commissioner will find it reasonable to assume that the majority underlying interests in the Trust have not changed. However, paragraph 8 continues:

8. On the other hand where, by the exercise of a trustee's discretionary powers to appoint beneficiaries or by amendment of the trust deed, there is in practical effect a change of 50% or more in the underlying interests in the trust assets - such as where the members of a new family are substituted as recipients of distributions from the trust in place of persons who were formerly the object of such distributions - the section would have its intended application as described.

6. The proposed deed of appointment does not appoint Trust distributions to any persons not already listed as beneficiaries of the Trust. Likewise, the proposed amendments in the draft deed of amendment do not add any new beneficiaries under the Trust.

7. As the Trustee continues to administer the Trust for the benefit of the same family under the proposed deed of amendment and deed of appointment and no new beneficiaries are added by the effect of these documents, then it is reasonable to assume that the majority underlying interest has not changed and it would not result in a refresh of the pre-CGT status of assets by operation of section 149-30(1) of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-47

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 subdivision 149-B

Cases

Commissioner of Taxation v. David Clark ; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550

Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [1999] FCA 1455; 99 ATC 5115; (1999) 43 ATR 42

ATO view documents

Tax Determination TD 2012/21 Income Tax: does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, or varied with the approval of a relevant court?

Taxation Ruling IT 2340 Income tax: Capital Gains: Deemed acquisition of assets by a taxpayer after 19 September 1985 where a change in the underlying ownership of assets acquired by the taxpayer on or before that date